Morning Report: 2 November 2016

2nd November 2016 By: Ranko Berich

GBP USD came under pressure yesterday, giving sterling room to rally a little further, but the pound pared its gains from Monday against the euro. UK equities followed asian markets lower this morning, as the FTSE 100 has dropped below 6900 for the first time in a month on growing fears of instability following next week’s US presidential election. This morning’s biggest political headline is that Chancellor Philip Hammond intends to take a flexible approach to fiscal policy, delivering only a modest fiscal stimulus while maintaining room to expand spending if the economy slows further. Markit’s Construction Purchasing Managers Index for October showed further improvement in reported output among the surveyed businesses, with housing activity leading the improvements.

EUR The euro remains buoyant this morning, as its rebound from last week’s lows continues, supported by firm data. Spanish, Italian, French and German Manufacturing Purchasing Managers Indices were all released comfortably in growth territory, indicating that the manufacturing sector as a whole across the continent seems to be improving, while German labour market data has shown Unemployment falling to yet another record low as job vacancies soared.

USD Political uncertainty continues to be a theme for USD this morning, which has weakened further against almost the entire G10 overnight, while equity indices sold off globally and the VIX index of implied S&P 500 volatility rose sharply. Yesterday’s good fundamental data did little to support the greenback, but it is worth noting that Manufacturing Purchasing Managers Indices from ISM and Markit both showed the sector in good shape, according the the surveyed businesses, while IBD Economic Optimism and total Vehicle Sales also beat expectations. Today’s data will also be worth watching, with ADP’s estimate of non-farm Payrolls released at 12:15 GMT, but it is likely to be overshadowed by tonight’s Federal Open Market Committee rate announcement at 18:00 GMT. The FOMC is widely expected to leave rates unchanged, but members have been dropping strong hints that a rate increase is likely in the near future, so the possibility of a hike can’t be excluded altogether.

CAD The loonie appears to have finally found some support this week, managing to make some very modest gains versus USD yesterday. Yesterday’s release of monthly Gross Domestic Product growth showed the economy grew 0.2% in August, although July’s growth was downgraded slightly. Bank of Canada Governor Stephen Poloz added to the dovish recent tone of BoC communication in a speech yesterday, reiterating that the Canadian economy faced significant downside risks in the future. Today at 17:30 BST Poloz’s colleague Carolyn Wilkins will speak in Toronto.

UK News

  • Reuters. UK construction growth hits 7-month high, but outlook darkens – PMI. Growth in Britain’s construction industry hit a seven-month high in October as housebuilding rose, but slowing order books and soaring prices for building materials darkened the outlook, a survey showed on Wednesday.
  • FT. Hammond seeks fiscal headroom to react to any Brexit fallout. Chancellor to banish rigid targets in Autumn Statement. Chancellor Philip Hammond is to adopt a new flexible fiscal framework in this month’s Autumn Statement, banishing rigid targets to ensure the government has “headroom” to react if Brexit fallout hits the economy.
  • FT. UK to be downgraded if loses ‘core access to single market’ – Moody’s. Britain will have its sovereign rating cut should the government fail to secure access to “core elements” of the EU’s single market, one of the world’s foremost ratings agencies has warned, underscoring the economic significance of the bloc’s internal market in the upcoming Brexit talks.